Choosing Social Impact Bonds

Bridges and Bank of America Merrill Lynch jointly launched a new report, ‘Choosing Social Impact Bonds: A Practitioner’s Guide’. The report is the first piece of research that has looked globally across the first wave of SIBs to capture insights from early movers and reflect on the lessons learnt so far, to provide a set of practical recommendations for the three key parties involved in the sector: commissioners, service providers and investors.

SIBs are used across the world to help improve the lives of vulnerable individuals by targeting a wide range of social challenges including diverting children from care, supporting young people through training and employment, and reducing reoffending. According to the research, the increasing interest in SIBs – with almost 100 currently under development worldwide – lies in their ability to bring together three major trends:

  1. In light of increasingly tighter budgets, governments and donors are searching for ways to deliver better outcomes for beneficiaries using fewer resources;
  2. Impact-driven organisations continue to seek creative ways to increase desired programme outcomes in varied communities;
  3. There is an expanding pool of investors looking to harness the power of entrepreneurship to help address some of society’s toughest issues.

Unlike traditional arrangements where government and donors pay for a set of pre-defined activities, SIBs allow commissioners to reward service providers and their investors only if social outcomes are achieved. The report highlights how this ‘paying-by-results’ approach encourages organisations to be more entrepreneurial and ‘customer-focused’ in their approach, looking for innovative ways to deliver social impact or improving existing programmes to focus even more on measurable results.

For investors, the report recommends engagement from the start of their investment, influencing service delivery beyond contract signing to maximise the chances of success in delivering financial returns and social outcomes. This will require investors to take a ‘hands on’ approach from the outset. Where investors do not have the capacity or capability to do this directly, they might engage advisors or specialist fund managers to do this on their behalf.

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